Superior Oil Company v. Federal Power Commission

Decision Date25 September 1963
Docket NumberNo. 18252.,18252.
Citation322 F.2d 601
CourtU.S. Court of Appeals — Ninth Circuit

Murray Christian, H. W. Varner, and Roland B. Voight, Houston, Tex., for petitioner.

Richard A. Solomon, Gen. Counsel, Howard E. Wahrenbrock, Sol., and Peter H. Schiff, Atty., F. P. C., Washington, D. C., for respondent.

Before POPE, HAMLEY and BROWNING, Circuit Judges.

As Amended on Denial of Rehearing En Banc September 25, 1963.

HAMLEY, Circuit Judge.

This is a proceeding to review the action of the Federal Power Commission in rejecting, without hearing, certain rate-schedule and certificate-application filings. The filings had been tendered by petitioner, The Superior Oil Company (Superior). Superior is an independent producer of natural gas and is subject to Commission regulation under the Natural Gas Act (Act) 15 U.S.C. § 717 et seq. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035.

On April 9, 1962, Superior entered into a casinghead gas contract with the El Paso Natural Gas Company (El Paso) covering the sale of casinghead gas produced in approximately 2,640 acres of gas in the Aneth Field in southeastern Utah. This contract incorporates by reference the terms of a twenty-year casinghead gas contract entered into on June 11, 1958, by the same parties. This 1958 contract initially committed some 8,720 acres in the Aneth Field to El Paso,1 but by subsequent agreements sections of 800 acres2 and 2,560 acres3 had been added to the contract. Nothing in the 1958 contract, which was in form amended by the 1962 contract, required or expressly permitted Superior to add acreage to that originally listed.

Among the terms incorporated in the 1962 contract by reference to the 1958 contract were certain price escalation clauses. One of these, not objected to by the Commission, called for specified price increases at five-year intervals.4 Another provided for a price "redetermination" by the contracting parties, if requested by the seller, at each of these five year intervals.5 A third escalation provision was a so-called favored-nation clause, wherein El Paso agreed that it would never pay Superior less than the prices it was paying "others for comparable gas delivered under comparable conditions" within a specified area.6

On May 25, 1962, Superior applied to the Commission for an amendment to its certificate of public convenience and necessity for the purpose of authorizing it to sell gas to El Paso pursuant to the 1962 agreement. At the same time Superior made the related rate filing which would make the rate schedules then in effect, including the existing price escalation clauses described above, applicable to gas sold from the additional acreage.7

By letter-order dated June 15, 1962, the Commission summarily rejected, without hearing, the May 25, 1962 filings. In this order it was recited that the supplemental agreement of April 9, 1962, in effect incorporates by reference the terms of the contract of June 11, 1958, and therefore appears to incorporate pricing provisions other than those permitted by section 154.93 of the Commission's Regulations (18 C.F.R. Cum.Supp.1963 § 154.93).8 Therefore, the Commission stated in this order, the proposed rate schedule supplement and related petition to amend, were rejected "in accordance with Commission Order No. 242 * * * and section 154.100 of the Commission's Regulations. * * *" See 18 C.F.R. § 154.100.9

On July 9, 1962, Superior filed an application for reconsideration of the rejected supplement to the rate schedule, complaining that the summary rejection of its certificate application and related rate schedule filing was invalid. Superior did not contend that its contract did not contain price-changing provisions proscribed by the regulations relied upon by the Commission. Nor did the company make any request for an amendment of the regulation in question which would render it inapplicable as to price-changing clauses of the kind here involved, or for a waiver of the regulation as to this sale.10

Since the Commission did not act on the application for reconsideration, it was denied by operation of law on August 8, 1962.11 This petition for review followed.

Under the existing regulations, referred to above, there being no request for an amendment, waiver or repeal thereof, and no contention that the rejected filings did not contain price-changing provisions proscribed thereunder, the Commission was required to summarily reject the filings without hearing. It follows that the only real issue presented on this review is the validity of the regulations pursuant to which summary rejection was ordered.

As a basis for discussing Superior's attack upon these regulations it will be helpful to set out in detail their procedural history.

They had their inception in rule-making proceedings instituted in 1956. In the notice of this proposed rule-making, the Commission stated that it proposed to amend section 154.93 of its General Rules and Regulations (18 C.F.R. § 154.93) relating to the filing of rate schedules by independent producers, to describe certain types of contracts for the sale of natural gas which would not be accepted for filing as rate schedules.

The Commission's specific proposal was that it would not accept for filing contracts containing provisions calling for price adjustments stemming from:

"(a) escalation clauses based on price indices or changes in the price received by the purchaser upon resale, or (b) the payment or offer of payment of higher prices by the purchaser or other purchasers in the same or other producing areas to the same or other sellers."

21 Fed.Reg. 2389 (1956)

The Commission, in its notice, invited comments on or before June 1, 1956, and stated that it would not act prior to that date. Numerous responses were received by the Commission, including a protest from Superior. No further public action was taken in this rule-making proceeding until March, 1961. The record does not disclose the reason for the delay.

On March 3, 1961, Pure Oil Co., 25 F.P.C. 383, was decided in which it was held, among other things, that, for a number of stated reasons, the two-party favored-nation clauses in Pure Oil Company's contract with El Paso, and indefinite escalation clauses generally, are contrary to the public interest.12

In its Pure Oil decision the Commission concluded that it could not strike, as void or voidable, such clauses from Pure Oil Company's existing contracts. But the Commission announced its purpose to deal with the problem by issuing, for future application, regulations in appropriate Commission proceedings, including the rule-making proceedings which had been instituted in 1956.

In keeping with this announcement in the Pure Oil decision, the Commission on March 3, 1961, which was the day on which that decision was issued, filed its Order No. 232, in the rule-making proceeding (25 F.P.C. 379). After reciting the history of the rule-making proceeding, the Commission made certain general findings followed by several decretal provisions. These provisions added to the definitions contained in section 154.91 (a) of the Commission's General Rules and Regulations (18 C.F.R. § 154.91(a)), definitions of the terms "definite escalation clause," and "indefinite escalation clause," and added a proviso at the end of section 154.93, Rate schedule defined. The result was to declare inoperative, and of no effect at law, indefinite escalation clauses, as defined, contained in contracts tendered for filing on and after April 3, 1961.

Order No. 232 provided that any interested party might submit to the Commission, on or before March 20, 1961, views or comments in writing concerning these rule amendments. Interested persons did submit views and comments in response to this invitation, although none were filed by Superior. On March 31, 1961, upon consideration of these comments, and upon its own further consideration, the Commission issued its Order No. 232 A, modifying the amendments promulgated by Order No. 232 (25 F.P.C. 609).

In Order No. 232 A, the Commission reaffirmed the findings contained in its Order No. 232, that the use of long-term contracts for the sale of natural gas by producers to pipelines or to others is desirable and appropriate in the public interest but that indefinite escalation provisions are, in general, contrary to the public interest. The Commission stated, however, that it appears that elimination of all indefinite escalation provisions, as accomplished by Order No. 232, would be too restrictive to enable the industry adequately to cope with possible changing economic conditions over the span of long-term contracts. The Commission therefore concluded that, to allow for pricing flexibility and to provide an incentive for long-term contracts, it should permit future contracts to contain limited price-redetermination provisions, invocable not more than once in every five-year contract period and based upon rates subject to the Commission's jurisdiction.

Giving effect to this change of view, the Commission amended the findings contained in Order No. 232 pertaining to indefinite escalation clauses and the need of regulations governing such clauses. It also withdrew from section 154.91(a) the definitions of "definite escalation clause," and "indefinite escalation clause," which Order No. 232 had added to its regulations, and amended the proviso which that order had added to section 154.93, Rate schedule defined, to read in pertinent part as set out in the margin.13

The result was that, effective as to contracts for the sale or transportation of natural gas executed on or after April 3, 1961, all price changing provisions were determined in advance to be inoperative and of no effect at law, except those falling within the three numbered clauses specified in...

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